Electric cars and company directors

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Whilst I’m waiting (as everyone is at the minute) for my electric car to arrive… I thought it would be useful to put pen to paper and explain the advantages of a business owner getting a company car.

Now unless you’re looking at electric cars or vans, company vehicles are rarely tax advantageous to a company owner!

With diesel and petrol cars being banned by 2030, and hybrids by 2035, 2022 may be the year to make that move, especially given the rules for lower rates of benefit in kind, and capital allowances are here until March 2025, and we know corporation tax rises are set to increase from 2023 and National Insurance has already increased via the Health and Social Care levy.

If you want to look at the treatment of company vans, blog to follow. But for now, we’re going to explore electric cars in further detail.

We’ll look at the treatment for the company first and then move on to the treatment for you personally.

Impact on the Company 

There’s two ways people will consider getting a car, and I’ll talk you through the tax benefits of both. An outright purchase (cash or financed) or a lease.

Outright purchase

You may decide to buy your car outright, you could decide to pay for it upfront if your cash flow permits, or you may be looking at getting a car on Hire Purchase (please get your advisor to check that it fits the criteria as capital allowances could be missed out).

Buying outright, or with the right agreement means that the cost of the car, (which must be new and unused to qualify), will be taken and deducted against your taxable profits for that year, reducing your corporation tax liability.

From a VAT perspective, unless you are a taxi driver or a driving instructor, then unlikely any VAT can be recoverable on the purchase.

Case study: Elizabeth is looking at buying a new electric vehicle. She is projecting taxable profits of £100,000. The vehicle she is looking at buying will cost her £50,000.

Elizabeth decides to buy the vehicle outright due to cash availability. This will mean that she will be able to deduct the car from her profits this year to reduce her tax liability from £100,000 x 19% = £19,000. Taking into account of the car, she will reduce her corporation tax liability this year by £9,500.

Given increasing corporation tax rates soon, it may be worth considering the timing of buying or if you do buy consider instead of claiming 100% capital allowances in year one, to claiming smaller amounts of capital allowances over future years.

Case study continued: If Elizabeth, then went on to sell her electric car in three years’ time for say £21,500 then this would mean that she would get a balancing charge. This would mean she’d have to pay some of that tax back at around £4,000 in tax.

However, deferring when the capital allowances are claimed, may mean that Elizabeth could have saved over an extra £1,000 in tax!

Speak to your advisor, this could make a tax difference, especially if you’re then looking to sell the car within a certain time span too.

Checklist if buying out right:

  • Check you have sufficient profits to benefit from buying the car outright
  • Check if you have sufficient cash, or whether the vehicle should be acquired on Hire Purchase. Or whether other options should be considered.
  • If going for a Hire Purchase, please ensure that it qualifies for capital allowances.
  • Consider timing of the purchase, and ask your advisor if it is better claiming all the allowances this year or deferring some until the future. Also notify your advisor if you’re only planning on keeping the vehicle for a shorter period.

Lease

Whilst it can be great to own your car via the company which can be a great long-term investment that saves money; it can mean much needed borrowing power of your business is tied up in a motor vehicle. For your business, leasing may be the best option for you. Every business will be different.

Remember when comparing costs, extra charges for excessive wear and tear or exceeding mileage contracts can be incurred.

In terms of the tax treatment, each month the lease payments will be fully deductible. This means that they will reduce your corporation tax for the lease cost over your financial year.

In terms of VAT, you can also claim 50% of the VAT back on the monthly lease payments.

I understand how it’s taxed on the business, how does this impact on my personal finances?

So as a business owner, you’re likely to have taken a smaller salary, read our blog here if you need some tips, and larger dividends.

A company car is taxed on you as a benefit in kind.  For this year, this means you will take the list price of the car say £50,000 and apply a benefit in kind rate for the vehicle which is 2% for electric cars (from 2022), which means £1,000 will be added in effect as a salary cost. The true cost of this will therefore depend how you take your income. It will however push your band higher and so your dividends will need to be reconsidered.

Benefit in kind charge on other vehicles can be as high as 37% of list price for those highest emissions diesel vehicles! So a 2% benefit in kind charge on list price is nothing short of amazing!

What else can the company pay for?

This benefit in kind charge also covers the other following costs too:

  • Car insurance
  • Electric charge point at work – where the business installs, new and unused, charging points for electric vehicles up to the 31st March 2023, it can claim 100% FYA for those costs. Also super-deduction at 130%
  • Electric charge point at home – where the business is a company car, a tax free benefit of installing an electric charge point at home
  • Personalised number plates
  • Mobile phone docking stations etc

What about charging my car?

If you have a company car and the business does not pay for charging the vehicle, then you can claim 5p (previously 4p) a mile.

If you charge your company car at work, then this does not give rise to a benefit in kind and is tax free. Additionally, if you are provided a charge card this is also tax free. However, if your company reimburses you for your electric at home, then this will be treated as earnings.

Other options to explore

Instead of the normal outright purchase and leasing, a further option to consider especially for employees is the salary sacrifice scheme, this means that you pay for this out of gross income from your payslip. So, the company will not benefit from anything other than a reduced employers liability which if you’ve structured your extraction correctly will not be relevant for you, but for employees will be a great option. 

Want to chat it through and model the numbers speak to our Bev, you can contact her on bev@vibrantaccountancy.co.uk or 01332 460184.

Contact Vibrant Accountancy Derby Accountants Bev Wakefield

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